If you’re thinking things are different now - for the better - you’re not entirely crazy. Though the futures are set to open in the red today (which means nothing anymore), the prior three trading days have gone far in getting the market out of its freefall and into a recovery mode.

Yesterday we made our third consecutive close above the 10 day line for the first time since August, and we closed above the 20 day moving average line for the first time since September. Not that there’s any magic formula or secret number to ‘cross’ before things officially change, but this does point to  a clear shift in momentum…..a shift from ‘clearly bearish’ to ‘not bearish’.

My only concern is that some sellers are just biding their time, as they plan on using this brief bullish retest simply as an exit opportunity. Volume was light yesterday, so the effort wasn’t the majority opinion.

If we can get a higher volume rally sometime today or next week, and if we can break past the short-term resistance line I plotted below (which by default would get us well past the 20 day line), then I could be a lot more confident in any rally attempt. I know we’re more than ripe for it. Take a look at the chart, but then keep reading for a quick take on the VIX.

The VIX’s chart looks like an inverted chart of the average index right now…it’s finding support right around the 20 day moving average line. As I said in a recent blog entry, a close or two under that 20 day line would go miles in telling me the momentum had shifted in a bullish way. See, the support the VIX got at the 20 day average back on October 21st and 22nd was an early warning that the market’s rebound attempt then was failing.

You’ll also see an intermediate-term support line for the VIX that extends back to mid-September. Consider that a confirmation signal line.

In both cases, notice how the 10 day lines (red) are basically flattened, and both 10 day lines are starting to close the gap between the 20 day line (blue). That’s not a huge deal, but it does quantify the notion that the momentum is changing. Like I said though, a higher-volume move in the right direction is what I need to see. Volume is the key to any longevity. 

Did you know there are some thoughts and comments that only appear in the e-mail version of our newsletter? That’s right - if you’re just reading the blog or the online version of the newsletter, you’re not getting everything. Be sure to sign up for it today

I hope the title of this entry didn’t come across as overly-encouraging, since I still see some vulnerability out there. However, as objectively as I can be, things really did appear to change for the better for the market on Tuesday. Today is the key to cementing those bullish changes for the better.

Did you know the S&P 500 has not made two consecutive daily gains since September 26th? We’ve seen five huge single-day gains over the prior twenty-two trading days, but we couldn’t string two of them together. That’s been the problem for a while…no follow-through.

However, we did do something yesterday that was at least a little exciting. Both the NASDAQ and the S&P 500 broke past intermediate-term resistance lines. Check out the charts, but keep reading - we’ve got a bigger point to make.

All of this makes today a critical day; it could be the first time we make back-to-back gains in over a month. To see it happen after breaking through a ceiling just gives it a little more meaning. Until the egg is hatched though, I’m not counting the chicken. U.S. stocks are struggling right out of the gate today, which doesn’t exactly scream bullishness.

On the flipside, both charts have given us some key support lines over the last few days too. The NASDAQ’s line in the sand is 1500, while the S&P 500’s is at 846.

Check back later today - I’ve got a couple of other things I’m looking at (like the VIX and the shift in the volume trend), and these charts may look totally different then. 

Did you know there are some thoughts and comments that only appear in the e-mail version of our newsletter? That’s right - if you’re just reading the blog or the online version of the newsletter, you’re not getting everything. Be sure to sign up for it today.

I swear I’m not making this up. For all you who jokingly referred to the small cap company SpongeTech (SPNG) as the cartoon character SpongeBob (SpongeBob Squarepants), well, you may not have known how right you’d eventually be. As of today, SpongeTech is licensed to create a SpongeBob bath sponge. Like all of SpongeTech’s sponges, these children’s bath sponges are pre-loaded with soap…perfect for kids and easy for parents.

Yes, I promised to drop this company, and I will. I just thought this was too good to not mention. If there was ever a more appropriate product/licensing tie-in, I can’t think of it.

Frankly, I think this is one of the very first marketing venues I would have tried to tap. SpongeBob is huge; the cartoon attracts 70 million viewers every month. (And I admit it…I occasionally get roped into being one of those viewers by my two nephews. It’s not a bad show actually.) The target customer is the same for both the show and the sponge…2 to 5 year olds.

I wonder if this product line could be the one that really puts the company on the map. I can’t wait to see the product - should be pretty hilarious.

There’s also a ‘Dora the Explorer’ and a ‘Go Diego Go!’ sponge on the way, but those clearly don’t have the same brilliantly-ridiculous charm that you get when you turn a talking, cartoon sponge into a real, functional sponge.

I’ll see if I can get a picture.

Did you know there are some thoughts and comments that only appear in the e-mail version of our newsletter? That’s right - if you’re just reading the blog or the online version of the newsletter, you’re not getting everything. Be sure to sign up for it today.

Don’t freak out about the Conference Board’s Consumer Confidence figure for October. Though the drop to a reading of 38 was the biggest drop ever, and the lowest reading ever, it’s not like it’s real news here in the shadow of a credit implosion and a crashing market. If anything, I’m actually more apt to be bullish than bearish here. Why? Glad you asked…

There are two kinds of data all investors think about. Some of it is leading; most of it is lagging. Consumer confidence is a lagging indicator, telling us what folks thought about what recently happened to them. It’s supposed to be about their optimism regarding the next six months. Let’s get real though - can any of you quit thinking about the last two months? Investors, taxpayers, and real estate owners have all been hit hard. Of course confidence is going to be shaken.

The question is, just how long can confidence be this weak? Based on history, probably not very long.

On the chart below, I’ve plotted the historical consumer confidence data going back to 1978. I’ve also added the S&P 500 to the chart, to compare the two. If there’s one thing that becomes clear it’s this….pessimism is never permanent. Despite all sorts of reasons to be down in the dumps, human beings want to believe - and behave as if - things will eventually be alright. More specifically, people will start to invest, buy houses, and spend money again.

The point I want to make, though, is this….terrible confidence is usually a sign of a market bottom. Look at the history on the chart. All the major lows (the ‘V’ shaped bottoms in confidence) are also low points for the stock market.

Of course this adds another dimension to the analysis - the reversal of the downtrend and beginning of the uptrend. As long as confidence is falling it’s bad for stocks. When it’s rising, it’s good for stocks. At 38 though, I don’t know how much more it could fall.

So, at this point I’m more bullish than bearish. I’m just biding my time. That’s what I’ve been saying for close to a month, but it’s still true. The fact that the average consumer is freaking out right now means - if anything - it’s a good time to start stepping in again. The short term could still be a mess. Longer-term though, I think the sellers overshot. Low confidence is a symptom of that.

The aggressive investor would be buying right now. The tempered investor would wait to see confidence start to trend higher again, though even the tempered investor won’t wait too long. The amateur investor will wait until confidence is closer to 100, though the market’s recovery will be closer to being done than being started by then.

Did you know there are some thoughts and comments that only appear in the e-mail version of our newsletter? That’s right - if you’re just reading the blog or the online version of the newsletter, you’re not getting everything. Be sure to sign up for it today.

You don’t need me to tell you most everyone is expecting a rate cut of some sort tomorrow. The economy is in shambles, and lending has screeched to a halt. The Fed needs to inject a shot of adrenaline into the mix, and hope like crazy it works. According to the Fed Funds futures, there’s a 1 in 3 chance the rate cut will be ¾ of a point, and there’s a 2 in 3 chance of a 50 basis point rate cut. The latter I can see, but I think the former is a little but overboard.At the same time, half of the economists polled are looking for a ½ point cut, a fourth of those economists expect a ¼ point cut, and about a fourth of them are not looking for any change at all.

Normally the Fed Funds futures have been pretty reliable predictors – more so than economist’s predictions – but this time around is different. This time around, the Fed’s overnight lending rate is actually well under its target rate. That’s the first time we’ve seen that disparity in a long time…as in years.

The overnight rate is what banks charge each other for very short-term loans, but that’s the rate traders look at when trying to figure out just how far the Fed needs to go to get them to the same level. Now, however, the effective overnight rate is 0.9%, while the target rate is 1.5%.

Normally that would indicate a 50 basis point cut was in store. These are hardly normal times though. There’s a realistic chance a 50 point basis cut could send the overnight rate to 0.4%. The disparity would be maintained, even though the intent was to get the two rates aligned.

Why the problem now? When the Fed/Treasury starts to inject $700 billion into the whole system, it can skew those rates. It’s not a bad thing or a good thing – it’s just an indication of money flowing in.

This may be one of those times where the Fed doesn’t really need to do anything – the sheer possibility of a target rate cut has caused the effective rate to make its way there already. Point being, don’t be completely shocked of all those economists and Fed Funds futures are wrong. The Fed may need to do nothing except just accept the situation for what it is now.

Now, all of us understand that. However, let’s face it – the market’s not going to like not getting a rate cut. (Of course, the market won’t be happy until rates are 0.0% either.) So, I suspect we’ll see at least a pittance…nothing less than a ¼ point cut, but nothing more than a ½ point cut. But, I think it will be irrelevant.

Did you know there are some thoughts and comments that only appear in the e-mail version of our newsletter? That’s right - if you’re just reading the blog or the online version of the newsletter, you’re not getting everything. Be sure to sign up for it today.

You know, it dawned on me today (ok, it hit me like a ton of bricks) that most financial journalists don’t really know enough about their ‘beat’ to do their job adequately. Case in point…the so-called credit crisis and financial meltdown we’ve seen over the last two months. Not too many reporters have really explained the events leading up to the implosion, though they all seem to have fluttered around it on occasion. I suspect the reason is just that their understanding of the whole thing is fairly limited. That’s a problem for serious investors who rely on these guys to get meaningful and factual information.

I’m not going to beat up the authors of the two articles I read today that drove me to this conclusion. Let’s just say I’d never heard of either one of them. However, both of the outfits they worked for were very reputable… which apparently doesn’t mean much these days.

So, since nobody else seems willing or able to, I’m going to devote some time to describe what really caused the mess we’re in now. Here’s the deal though – there are actually three distinct problems we’re dealing with. Yeah, one fuels the other two, but each has their own unique cause and solution.

Since each problem requires a somewhat-lengthy explanation though, I’m going to break this down into three bog entries. I’ll attack each problem one at a time, starting today with what happened to AIG and other insurance companies.

By now you’ve probably heard the acronym ‘CDS’ batted around. That’s short for what’s called a Credit Default Swap, which is just a fancy way of describing insurance against the default of a debt obligation.

Have you ever had mortgage insurance? Most lenders require you to purchase mortgage insurance if the equity in your home is worth less than 25% of your home’s value. Ultimately you pay for it, but it’s actually designed to protect the lender if you should happen to go into default – the insurer makes those mortgage payments to the lender if you can’t. Needless to say, it’s the mortgage insurance company assuming the bulk of the risk in the relationship.

Well, credit default swaps are basically the same thing. However, it’s called a credit default swap when done to protect the issuer of what’s called a collateralized mortgage obligation (CMO) or a mortgage-backed security (MBS).

You know who issues CMOs and MBSs? Mortgage lenders like Fannie and Freddie, but there are dozens of non-government entities doing the same. They’re essentially packaging up mortgage loans, and selling them to buyers looking for income, and decent returns. For all practical purposes, CMOs and MBSs act like fixed income, and trade as such.

However, to make a CMO or an MBS more attractive and less risky, those issuers will attach CDS insurance to them. If the underlying mortgage borrowers don’t pay (in part or in full), then the insurer will step up and make those payments to the owners of the CMOs or MBSs.

You know who’s one of the biggest CDS insurers around? AIG. However, that in itself still doesn’t explain why the mortgage-backed security market came unraveled. The problem largely lies in the way insurers like AIG are required to have liquid assets to cover their obligation if and when those CMOs or MBSs go into default.

See, a mortgage-backed security may hold pieces of (literally) hundreds of different mortgage loans. It’s no secret that some loans are going into default. By and large though, most borrowers are still making payments on time. That doesn’t matter right now. The current requirements are such that if the ‘quality’ of a CMO or MBS slips by just a little, then insurers like AIG are required to come up with enough cash to cover the entire face value of the CMO or MBS.

Or to say it another way, CDS insurers are being forced to act as if all the borrowers within a CMO are in default, even if only a small fraction of them are.

Well, between ARM loans, negative equity in real estate, a recession, and over-extended consumers, pretty much all CMOs and MBSs have ‘triggered’ the cash requirement for complete coverage.

The problem is, these insurance companies don’t have this kind of cash. On the other hand, they really don’t need it.

The fact of the matter is, no insurance company of any kind would be able to pay all the claims if 100% of their customer base all filed claims simultaneously. The actuaries have figured out what the ‘optimal’ insurance premiums are that controls their likely payout risk, yet keeps the insurance affordable. They’re not going to assume the worst could happen all at the same time, because it just wouldn’t.

However, CDS insurers are essentially being forced to act as if 100% of all their insured packaged mortgage debts are in default. Of course that’s not the case…most mortgage debt is still being paid.

It’s a ridiculous rule, and probably one companies like AIG never figured would be a problem. When the defaults started to pile up though, a little bad debt went a long way – in the wrong way.

It’s dumb for one reason…it assumes the worst, even though the worst is not the way things really are.

Here’s an analogy. Suppose you owe $200K on your mortgage, but can only sell your house for $150K. Your actual net liability (and potential loss) really is only the $50K difference between the two. According to the government though, you don’t get any credit for the real estate’s value. All they’re seeing is the loan liability, and they want you to put up $200K in cash as collateral.

CDS insurers are essentially going through the same thing… they’re being required to put up the cash for the entire face value of their CMOs or MBSs, but they’re getting no credit at all for the value – even if depressed - of those securities. The process is called marking-to-market, which really doesn’t fairly value the CMOs in question.

That’s why the insurance industry has been so desperate and strained lately. They need cash, and they just don’t have it handy.

A simplified explanation? Yeah, but at its core it’s a simple matter that’s been made overly-complicated by the media….or not been explained at all.

So, that’s phase one. I still want to look at the real estate implosion, and the unwillingness of banks to lend. These are separate issues though, and I’ll be covering them in a different entry.

Did you know there are some thoughts and comments that only appear in the e-mail version of our newsletter? That’s right - if you’re just reading the blog or the online version of the newsletter, you’re not getting everything. Be sure to sign up for it today.

Not to keep dwelling on something we put to bed a couple of weeks ago, but you may be interested to know that small cap company SpongeTech Delivery Systems (SPNG) has raised its 2009 revenue forecast from $35 million to $40 million. The announcement was prompted by significant orders from new customers.

Concerns had been expressed that SpongeTech’s customer base was limited to two big ones, and really only three significant buyers. Adding some new ones will help stave off some of that isolation risk.

The stock seems to be responding a little, though it’s still not even challenging last week’s highs. Nothing new there. On the other hand, it’s been tough to distinguish between a stock’s organic weakness and the market’s overall bearish tide.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Despite the media’s best efforts to scare the last remaining investors out of the market, this morning’s “recession worry” selloff did no worse than to push stocks to their support levels I mentioned yesterday…give or take (the NASDAQ is an exception). So, the odds of a bullish breakout are still as good as the odds of a bearish breakdown. Of course, we’re much closer to the breakdown side of the equation.

The picture tells the story better than I can, so take a look for yourself below.

By the way, the VIX peaked just shy of 90 today. That was something I never expected to see in my lifetime. Nevertheless, it’s the hand we’ve been dealt, and we can’t ask for a re-deal. However, I think I’ve pretty much come up with the clue I want to see from the VIX to get bullish again.

Remember a few days ago when I gave you the easy, alternative way to trade the VIX? In a nutshell, rather than just eye-balling it for peaks and bottoms, I advocated simply using crosses of its moving averages to signal bearishness and bullishness. I want to tweak my strategy slightly for the current environment.

Did you know the VIX has basically not traded under its 20 day average since August? It’s only fallen under the 10 day average a total of four days out of the last 39….a testament to the degree of slaughter we’ve all been through. Even more interesting is how the 10 and 20 day lines have been pretty precise support the last three months.

I told you I wasn’t going to give away the parameters of my VIX moving average ’system’, and I’m still not. However, I have no problem telling you that, right now, I’m looking at the 10 and 20 day lines. I’m not looking for one to cross the other. I’m just looking for the VIX to close under them. I’m really focused in on the 20 day line.

Here’s the chart. More to come later today.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Despite the fact that stocks are down about 3% right now, after hitting today’s lows it’s become clear that the market is range-bound right now. The daily swings inside the range are huge….volatility has become the norm, and daily 4% gains and losses are to be expected anymore. However, it doesn’t negate the fact that the net progress over the last two weeks (since 10/10) has been a big fat goose egg.

That’s not a good thing or a bad thing. It’s just something to be aware of. I for one am actually glad the indices are treading water right now. Nobody still has any real conviction about where things should be going, but at least they’re not selling indiscriminately. It just shows that fear isn’t gripping us all so tight. Well, it’s still gripping us tight, but it’s sharing grip-time with greed.

The bigger picture upside is the potential breakout or breakdown we’ve got brewing. After this consolidation move is done, a move to new lows could start another wave of trade-worthy selling. A break to new highs (see below) might finally jump-start that bounce we’ve been waiting to see.

I’ll look at the S&P 500’s chart to draw my lines in the sand (support and resistance), but the other major indices look about the same, and have comparable lines.

My primary resistance line is at 984, where the S&P 500 peaked early this week and late last week. There’ a secondary resistance line at 1045…the high from last week. A close above the primary line (and especially the secondary) line I would interpret as a short-term bullish cue.

As far as support goes, it looks like 861 is the key. That’s roughly where stocks started to recover today, and about where they rebounded last week. There’s a secondary support line at 840…the multi-year low hit two weeks ago. A close under either line would likely mean more bearishness ahead.

I know I didn’t talk about values with this take. That’s because values mean very little right now. Nobody knows what to value stocks at anyway, with this unprecedented economic backdrop nagging at us. So, how do you have a really meaningful discussion when fear and greed are likely to override it anyway?

Once cooler heads prevail and we start seeing the normal <1% daily swings - and we break out of this range - we can talk about values.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

I kinda’ wish I would have waited until today to officially end our coverage of micro cap stock pick SpongeTech Delivery Systems (SPNG), though I’m not entirely sure it would have mattered. CEO Michael Metter sent out what has become a fairly routine letter to shareholders. Once again, the company’s growth is mind-boggling. Yet, once again, the market doesn’t seem to care.

All the same, since we’re the ones who stirred the pot a little over a year ago by suggesting it, we’ll wind down our coverage of this micro cap stock by giving the company the next-to-last word. (We always get the final last word.)

Here are some of the highlights from the letter:

• The company is on pace to do about $11 million in sales during their fiscal Q2 (which they’re in now). They did about $5.5 in fiscal Q1, and about $4.0 million in last fiscal Q4.
• They still expect to do about $35 million for the full fiscal year.
• Earnings in Q2 will be equivalent (on a percentage basis) to prior quarters. Their net margin in Q4 was right at 30%, and about 18% in Q1. So, we’re assuming their net this time around will be $2.5 to $3.0 million.
• They’ve got a lot of new products and new venues yet to be tapped.

Our take? A year ago we would have been pleasantly stunned at any company’s ability to double revenues from one quarter to the next. However, we’ve seen big growth repeatedly from SpongeTech, and the stock didn’t budge once. The swing to a profit (a nice one at that)? Didn’t matter - the stock still didn’t budge.

The issue was two-fold, though each fold was related.

First, the market just couldn’t get past the dilution; nobody realized the dilution was more than worth it (i.e. the P/E and P/S got wildly lower).

The second issue was just the company’s lack of communication regarding said dilution. The management team just let investors find out about the dilution the hard way…by letting them stumble across it in the 10Q.

One or the other issue can be overcome. When you have to overcome both though, well, let’s just say I’m not entirely surprised the stock suffered.

Still, as we finish the final chapter on the SpongeTech story, I’ll repeat what I said a few days ago - this is one of the strangest occurrences of ‘undervalued’ that I’ve ever seen. I had faith that the market would eventually ‘get it’. And, they still might. They haven’t yet though.

As it stands right now, the forward-looking P/E is something like 2.16, and the forward-looking P/S is around 0.52. Just amazing. I have no reason to doubt they’ll get the results they’re looking for either; they’ve met or exceeded every forecast they’ve made since we’ve been covering them.

Another time and another place, SPNG may have been a monster winner. If you’re still holding it, I don’t think you’re crazy. We just have to move on (the site) to make room for some other ideas.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

I know we just recently ended our coverage of small cap company Applied DNA (APDN), but I told you I’d keep up to date on anything important. Well, this is important (at least according to some of your questions)…CEO James Hayward is putting another $500K of his own money into the war chest. That’s a pretty big cash infusion for a company like Applied DNA.

It wasn’t his first big investment in his own company. He put in $800K about a year ago.

The cash will come in handy now too. Applied DNA had been running a little lean, according to some of the more recent 10Q’s. Though they are bearing revenue - and winding down a lot of the R&D stuff - the company is still in that critical stage between ’start up’ and being ’self sustaining’. This money may well get them over the proverbial hump while they solidify a couple more big projects.

And on a side note, it’s always good to see a CEO putting his money where his mouth is. Let’s just hope this is the last time it has to happen - you can’t stay on life support indefinitely.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

A few days ago when we started to look at potential market bottoms and average market values, a discussion was stirred up about which P/E (price to earnings ratio) was the right one to use for the S&P 500. That’s not an easy question to answer, as there are actually five you could think about. In no particular order, the current P/E measures are…

• 21.4, if reflective of actual trailing reported earnings for the last four quarters
• 18.3, based on forecasted earnings for the next year twelve months (analysts)
• 16.1, when based on forecasted operating earnings for the next twelve months (analysts)
• 15.9, if looking at trailing operating earnings for the last year (this removes those “one time” items)
• 11.2, if reflecting the forecasted operating earnings for the next for quarters (from the company)

For comparison, the ‘recent history’ (last twenty years) average P/E ratio has been 23, and the long-term (as in decades) average P/E ratio is more like 15.5. Clearly those are based on actual earnings, and not forecasted earnings.

After giving it some thought, I don’t think the P/E of 11.2 is realistic. Aside from being unusually low, that one price/earnings measure also comes from the companies themselves…and they may be overly-optimistic.

On the other hand, stocks are still undervalued by all other measures. It’s possible earnings may fall a little short of whatever the current expectations are, but still, they’re cheaper than the recent average.

I think I previously mentioned the S&P 500’s forecasted price/earnings ratio was around 9.0, but the source for my information didn’t cite their resources. So, I’m going to question that now. I got my data today from Standard & Poor’s. S&P is still capable of being wrong, but I trust their judgment and access to information better than most others.

Anyway, stocks really are (relatively) cheap right now, if you’re looking for values.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Banks are pleased today with the decrease in their inter-bank borrowing interest rate  - the LIBOR rate. It had been so painfully high (i.e. expensive and unprofitable) that lending had all but stopped… pretty much globally. However, with the 3 month LIBOR rate falling drastically and the 3 month Treasury rate not falling at all, the TED spread (the difference between the two) is now shrinking. Banks are finally seeing a light at the end of the non-lending tunnel.

As of right now, the TED spread is 3.17, off 12.45%, or -45 basis points. To my memory that’s the biggest single-day dip in the spread we’ve seen since it shot up in mid-September. And, it’s the lowest spread reading since September 25th. More importantly, it indicates some renewed confidence in the banking system.

Do we attribute this easing to any governmental relief effort, or is this an organic relief that was going to happen anyway? I pick the latter, though the mere promise of the former may have been enough to prompt the TED spread lower on its own. Either way, we’re pointed in the right direction.

Bottom line - the world’s not ending. It just stalled. It will still be a slow process in getting the TED spread closer to 1.0, where it usually is. However, banks are apt to get busy with lending again even with this small decline in the spread. If it can get back to 2.0, it could be like Christmas morning.

Our point is simply that this facet of the economy is currently pointing towards improvement. And remember, the economy doesn’t have to be perfectly healthy for stocks to move higher. The stock market is often predictive of the economy’s health.

The chart is nearby, though note it does not display today’s data. Imagine the current line is 46 basis points under Friday’s close of 3.62, which is where our chart leaves off.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Sometimes the positive details of a particular company are clear…the company will tell them to you. When the information comes from an unbiased and unprompted media source, those positive details mean so much more. So what? We’ve spent the better part of the last few months talking about the former for micro cap stock Bio-Matrix Scientific Group (BMSN). But, recent news of an Australian biotech breakthrough - heart cell generation from DNA found in fat tissue - has indirectly confirmed the need for a company like Bio-Matrix.

If the biotechnology sound familiar, it’s because Bio-Matrix has been gearing up to store massive quantities of adipose (fat) tissue for this very purpose – the possibility of creating any sort of cell for therapeutic purposes. Since all these treatments are tailor-made for a certain patient, each of these individuals has to store their healthy DNA (via fat tissue) if they want to be able to receive the cellular therapy later in life.

The underlying messages we’re getting from the Australian announcement are (1) the technology’s development is still going forward, and (2) the benefit of said technology may help treat heart problems…one of the biggest medical problems the world is constantly facing.

Bio-Matrix Solutions’ role in all of this is simply as the storage center for these millions of fat tissue samples; someone else will be developing the demand by advancing the science.

To be clear, the ability to cultivate therapeutic cells is not new – it’s the creation of heart cells that’s the breakthrough. So, Bio-Matrix won’t have to wait years for the technology to be completed before they can derive revenue. In fact, they’re ready to bear revenue now (and are actually in cell-storage negotiations).

Our point was simply to reinforce that the biotechnology of adipose/fat tissue isn’t just a quirky project. It’s getting more and more attention, and the bigger that industry becomes, the more money Bio-Matrix can make.

Here’s the link to the heart cell breakthrough news story. It’s a video clip.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Earlier in the week I posted a blog entry about how I interpret the VIX in my quest to spot market reversals. Ultimately, I apply candlestick analysis to find points in time when it’s become pretty clear the VIX has hit a bottom or top, and then confirmed that reversal by following through…. at least a little. I also suggested wrapping the VIX up in Bollinger bands to help you spot those scenarios where the VIX’s trend was changing direction. I hope you were able to embrace the idea of the strategy. If you did, then you also know there’s still some interpretation that needs to be done to actually trade it.

However, for those of you who are not into interpretation (if you’re more system-based and less discretionary), there’s another methodology you can use. It’s not as quick to give you a signal, so you may be late to the party in some cases. However, since it’s not as quick to give you a reversal sign, it’s also less apt to give you an errant buy or sell pattern.

The strategy is simple - use crosses of two of the VIX’s moving averages as buy or sell (bull or bear) signals. A cross above is a bearish pattern for stocks, and a cross below is a bullish signal for stocks. (Remember, the VIX usually moves in the opposite direction as the market.)

As always, a picture is worth a thousand words, so I’ve plotted two different moving averages for the VIX on the chart below. The ‘market’ proxy is the S&P 500. The faster moving average is the red line, and the slower one is the blue line. If you had bought or sold at their crosses over the last several years, you’d be up fairly nicely. (The buys and sells are marked with green and red arrows, respectively.) Obviously in a bull market the bear signals are less effective, and in a bear market the bull signals are less effective. Regardless, it’s a powerful tool.

What moving averages do I use? Sorry, can’t tell you that - this is something I look at for me, personally, and it loses its effectiveness if everyone else starts to use the same. The reason I’m telling you about it at all is to give you a tool that works, and is simple to interpret. I encourage you to experiment with your own moving average lengths anyway, to find something that works for you and your style.

On that note, I’ve found that this strategy works for any and all time frames, from 15 minute charts to weekly charts. So, anybody should be able to benefit from this methodology. I hope you can use it too.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

If stocks were to stop trading right now, the S&P 500 would actually post its first weekly gain since September 19th, and its first meaningful weekly gain since August 8th. Kinda’ makes you wish they’d swoop in and close the exchanges early, doesn’t it? Doesn’t matter. I don’t see anything coming down the pipe today that would disrupt the net result so far. It seems like expiration days like today tend to end about where they start.

Is this a sign that the long-awaited rebound is underway? No, not quite yet. Thursday’s high-volume rally was bullish, no doubt about it. However, the market has been unable to string two consecutive rallies together since the middle of September. If this is to be a recovery, we really need to see some volume and a gain today. (Even then though, we need to get back above Monday’s close to clinch the deal.)

However, there’s one thing I really like about today’s bar.

Remember when I was lamenting in a newsletter a few days ago about wildly bullish opens leave the market nowhere to go but down? That’s what happened on Monday - we saw a huge bullish gap at the open, and then even more rally during the day, to close out with gains of 11%. That’s just an engraved invitation to take profits, which the market started doing the very next day.

I specifically said if a rally was to be sustainable, the daily bars would have to start low, and move higher during the day. Furthermore, the better-paced the rally is, the longer it would last. That’s why Monday didn’t kick-start a really….the pace was unhealthy.

Well, guess what happened today. The QQQQ’s, the SPY’s, and even the indices themselves (most of which open at a funky mark-to-market price) all opened a little lower today, and have been mostly trying to move upward. The day isn’t over yet, but even a modestly higher close today could go far in easing the anxieties that fuel volatility.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Though our coverage has officially ended for micro cap stock Applied DNA Sciences (APDN), we know a lot of you are still interested, and perhaps even owners. So, we’ll keep tabs on it for a while longer before taking it off the radar. For instance, we wanted to let those of you who are shareholders know the annual stockholder’s meeting has been rescheduled to take place in December.

The Applied DNA shareholder meeting will take place on December 16th at 11:00 am. The location is the Charles Wang Center in Stony Brook, New York.

Don’t read too much into our eventual discard of Applied DNA. We liked the concept when we first found the company, and we still think there’s a market for what they do. Between their slow growth pace and an unfriendly market though, we have to move on to bigger and better things sometime.

As for what you should do with any APDN, that’s up to your time frame and expectation for the company. However, based on our observations over the last year or so, we think it should be viewed as a long-term holding, if anything.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

I vowed to keep an eye on it and let you know, so, I’m letting you know - the TED spread is finally starting to move lower. At the current reading of 4.10, the spread is down 24 basis points for the day, and under the recent peak of 4.63 by 53 basis points. And hey, whaddya’ know - the market’s up nicely as well. The TED spread’s sinking, and stocks are going higher? Maybe all hope isn’t lost after all.

If you missed the original TED spread chat and the follow-up explanation, here’s a quick summary - the higher the TED spread is, the more difficult it is for banks to lend and borrow money and remain profitable. That’s what they mean when they say the credit market has dried up recently….the TED spread has been so high it’s discouraged banks from borrowing. (If you want the full explanation of the TED spread, just click here.)

Anyway, here’s the chart. We’re still miles away from where we’d all like to be, but at least now we’re taking baby steps to get there.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

Dear Small Cap Network Editor,

I have read over the past couple of weeks, the derivatives created in the past several years, are going to bury our economy. One article I read stated there are approximately sixty-six trillion dollars $66,000,000,000 of these instruments that are now practically worthless, and another article stated over eighty-eight trillion. My question is, how will the effects of these worthless derivatives effect the companies that hold them, and how will these companies survive after they write them off as worthless. Additionally, if these companies write these off, many of them will show substantial decreases in their net profit for the year, while some companies will show losses. If that happens, many companies will be paying much lower income taxes or have tax loss carry-backs or carry-forward losses, which will then have an effect on the taxes they pay to our Federal government, state governments and local governments. Won’t this have an enormous impact on the tax revenues for which the various governments operate? I look forward to your response and explanation.

Editor’s Response

Thanks for the question. The answer is yes, write-downs will impact tax revenues adversely. However, as to the extent it will negatively impact tax revenue - and the ripple effect it could have - it’s immeasurable. It may be catastrophic. Or, it may be imperceptible. I don’t know, and I’m not entirely sure anybody knows.

However, even at its worst I don’t think it will kick-start a depression….the government never seems to have enough anyway, so what’s a little more shortfall going to mean?

Also bear in mind that as nasty as those write-downs could be, it’s just the financial industry taking them. While other sectors suffer to some degree from the fallout, most of the headache is reserved for the financial sector. It’s the biggest sector, but it’s not like the well will run completely dry.

Anyway, youre thinking is right, but I can’t put a number or degree on the result. So, I can’t fully respond. I’ll put your question (and my answer) out here in the open though. Maybe an economist will stumble onto the site and be able chime in below.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.

We’ve been trying to answer as many questions from our readers as we can in the midst of this market meltdown. There’s a lot of opportunity in it, but also lots of danger. So, if we can provide some much needed perspective about how to handle it, I think we’ll all come out better for out. That said, we’re surprised we only got this question once, since we’ve been deliberately ambiguous on the matter. The paraphrased question was….

When you’re talking about a bottom, do you foresee one bottom, or several strong bottoms as part of the bigger bottoming process?

Our answer is….we’re just dealing with one bottom at a time, so we assume any bottom is ‘the’ bottom until we have a reason not to. But, we’re certainly prepared for more than one.

The truth of the matter is there is no standard pattern that plays out at a bottom. The people who think we’re going to see several retests of recent lows are looking back to late 2002 and early 2003 as a clue, when the market made three drastic lows before starting a recovery. Something similar played out in 1994, when it took a series of lows to complete the flushout and begin the next bull market (though that bear was nowhere near as nasty as this one’s been).

However, there’s just as much support for a one-bottom theory….a ‘V’ shaped chart like the one we saw in 1990.

The 1987 crash was technically a double-bottom, but effectively a one-bottom move. It was just so volatile after the October tumble that it was difficult to distinguish between bearishness and bullishness. By December of that year though, the ultimate lows were made and the recovery was underway.

We also saw distinct one-bottom lows in 1984, and in the middle of 1982. (In 1982 we saw a couple of sharp selloffs leading to lower lows and minor rebounds into the bigger downtrend, but nothing that would qualify as a triple-bottom.) The bottoms in 1978 and 1974 were also one-bottom ends to their respective bear markets.

The point is, nobody knows how many times the market will have to get smacked to make a permanent bottom. Maybe one, or maybe three. Maybe five - nobody knows. Therefore, I strongly suggest assuming nothing. To try and make a prediction would be quite impossible.

Instead, if you really think we’re at ‘the’ bottom, I feel the best thing to do is phase into bullish trades on the way up. There’s a catch to the strategy though - you absolutely have to be willing to bail out of those very same trades when it’s clear that there’s another low on the way. If your ego can deal with doing that, then it’s time to go fishing.

Does that mean you may take small losses if you have to sell out if another selloff is made? Yep, but I don’t mind losing 5% to 10% a couple of times if it means I’m in the market at the very beginning of what will be the next bull market. Even Babe Ruth struck out more often than he hit a home run….but those precious home runs were worth it.

The alternative is to wait for certainty. That’s the higher-odds, lower-payoff strategy, since you miss the early chunk of the rebound. But, you won’t get burned by being wrong about where the market bottom was.

My ‘phase in’ strategy is sort of a hybrid of both, designed for the skeptic and the speculator.

In the meantime, don’t get bogged down by trying to figure out how many bottoms we’re going to make….nobody can possibly know.

By the way, if you want to see a long-term history of all the major bottoms for the S&P 500, click here for 1990 through 2008, and click here for 1970 through 1989. You can see how no two bottoms are alike. You’ll also see how the one-bottom move is more common, but recent history has dished out more multi-bottom ends to bear markets. Like I said, nobody really knows what we’ll get this time around.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.